Consumer search costs, geographical concentration, and retail gasoline pricing: Evidence from inland Japan

Abstract

We examine determinants of retail transaction and list prices for gasoline using cross-sectional data for gas stations in inland Japan. The study makes two original contributions: it examines inland Japan where gasoline prices at proximate stations theoretically should be identical, and it analyzes retail transaction and list prices for gasoline. Empirical analysis yields three results. First, the concentration of stations correlates negatively with gasoline prices, but its effects are attenuated by increased numbers of uninformed consumers. Second, stations should set retail prices that include markups based on location, their service features, and brand affiliation. Third, they should charge different markups for different grades of gasoline based on concentration of stations and location. Our findings suggest that consumers’ search for stations that set lower price could significantly influence pricing and that providing price information could reduce search costs and gasoline prices, thereby raising social welfare.